[ForexNews]

The USD correction has gained momentum with equity markets trading lower. The ING break up has led to speculation that other banks that have received state aid in Europe may face the same destiny. Add to that the equity required to be raised by banks globally to fulfil regulatory requirements and it becomes clear that the banking sector is set to under perform the general equity market trend. However, the financial sector has been out performing the March equity market rally so far, suggesting that the unwinding of existing long positions will keep this sector under significant selling pressure in the short-term. The S&P 500 support at 1040 is likely to be tested and with market sentiment weakening the US durable report,
due out today, may develop a significant impact in the case of delivering a weak reading.

Yesterday’s release of weak US consumer confidence, with the current conditions index falling to the lowest level since 1983, and continued weak readings of the weekly ABC consumer climate indicator (falling to a three months low), suggest that the US economy is still reacting to the swings in the fiscal stimulus provided by the US administration. Consumer climate has immediately swung back after the cash for clunkers programme expiring. This is not good news for the US economy and might explain why the 2-year auction went very well yesterday. However, the 10bps yield decline across the curve has not been accompanied by reduced inflation expectations when measured by the Tips market. Even the consumer climate sub-component showed inflation expectations remaining unchanged despite weak underlying demand. This does not bode too well for the near-term bond market outlook, but is not positive for the equity market either. Meanwhile, markets have started to talk about the German fiscal expansion and the stabilising effect on the eurozone economy. There has been substantial divergence built between EMU members in respect of unit costs, leverage and economic efficiency. In order to increase inner EMU stability Germany should become more demand oriented, as they are now dong. The previous government refused to go this route, but the new CDU/FDP coalition government has signed a coalition treaty providing Germany with a 2.5% fiscal expansion next year at a time when other EMU countries are consolidating fiscal balance sheets. This policy approach is very constructive for the EUR and increases inner EMU stability and in this way is an autonomous positive factor for the EUR. Nonetheless, the equity/risky asset sell-off will keep EURJPY offered with a test of 130.00 looking increasingly likely. EURJPY has become the lead for EURUSD with a break of 1.4740 targeting 1.4650.

Markets continue to be driven by interest rate differentials. The AUD has come under selling pressure after NAB reported a loss due to loan provisions and the release of weak CPI data, reducing the likelihood of the RBA hiking rates by 50bps in November.